- Page numbers followed by f and t refer to figures and tables, respectively.
- A
- Advisors:
- trusted, 155–156
- from wealth management firms, 200, 214
- Allais, Maurice, 12–13, 187–188
- Alpha‐stable distributions, 67, 68, 69f–71f, 168–169, 170f
- Angel investments, 165–166, 168, 171
- Antifragility (Taleb), 138
- Arnott, Robert, 6
- Arrow, Kenneth, 158n4
- Aspirational goals, 7, 16, 27, 43, 134, 147, 162, 165–166, 168–169, 171, 190, 192, 212
- Asset location decision, 120–122
- B
- Bayes' rule, 67
- Behavioral economics, 6, 12, 13, 165, 173–174, 177, 183, 187, 192, 212
- Behavioral finance, x, 13
- Behavioral portfolio theory (BPT), 8–9
- Bellman's dynamic programming technique, 46–47
- Benchmarks (benchmarking), 80, 125, 128–129, 132, 201–202
- Bernoulli, Daniel, 2–3, 182–184
- Bhansali, Vineer, 80n9, 175n2, 216
- Bid‐ask spread, 119
- Binary distributions, 165
- Binomial distributions, 166
- Bitcoin, 169
- Black and Litterman model, 63
- The Black Swan (Taleb), 138
- BPT (behavioral portfolio theory), 8–9
- Breakeven price, 76
- Brier score, 132–133
- Brownian motion, 90
- Brunel, Jean LP, ix–xiii, xvii, 8–10, 14, 24, 35, 199, 215
- “Buckets” (in mental accounting), 7
- “Bucket approach,” xi
- C
- Capital market expectations, 38, 39, 39t, 45–50, 53, 54t–55t, 59–61, 109, 115–117, 116t, 132, 133, 143–145, 202, 206, 211, 216
- Capital markets, understanding, 210
- “Certainty threshold,” 47–49
- CFA Institute, 215
- Chain rule, 61
- Chen, P., 89
- Chhabra, A., 15
- Client(s):
- Coin flips, 2, 169, 175, 179–184, 189
- Complete (axiom of rational choice theory), 12, 17
- Computing power, 43, 112, 209
- Constitutions, family, 153–154
- Constraints, real‐world, xvii
- Continuous (axiom of rational choice theory), 12
- Convexity, 138
- Creativity, 124
- Cumulative prospect theory (CPT), 7, 188, 192
- D
- Das, Sanjiv, xi, 8–9, 46, 215
- Deguest, R., 15, 131
- Descriptive theories, 13
- Douady, R., 138
- “Double dipping” of assets, 142
- Downside risk, 75
- Dual shareholder‐operator role, 150–153
- Duty, family members' sense of, 149–150
- Dynamic Hedging (Taleb), 215
- Dynastic wealth, 158–159
- E
- Economic theory, 173
- Effective shareholders, 150
- Efficient frontier, xi, 25–27, 43, 46, 161–163, 177, 190
- Emotional intelligence, 210
- Employees, shareholder's responsibility for, 152
- Enterprising Investor (blog), 215
- Entrepreneurs (entrepreneurship), 147, 148
- ESG objectives and constraints, 98–99, 135, 203
- Estate taxes, xiii
- ETFs, 78, 119
- Ethical objectives, 149, 203. See also Impact investing
- Event significance, effect of linear increases in, 138–139
- Expected Returns (Ilmanen), 215
- Expected shortfall (of a goal), 131
- Expected value theory, 1–2, 175, 182–183
- F
- Failure, probability of, 8, 9, 22–26, 34, 59–62
- Fama, Eugene, 72
- Family businesses, 149–151, 213
- Family constitutions, 153–154
- Family governance, 151–156
- Family narratives, 155
- Family trusts, ix
- Family vision, 155
- “Fat tails,” 68
- Feedback, client, 32
- “Feepocalypse,” 205, 214
- Financial Analysts Journal, 215
- Financial goals, xix
- Financial losses, 6–7
- Financial Modeling Under Non‐Gaussian Distributions (Jondeau, Poon, and Rockinger), 215
- Financial plans (financial planning), xviii, xx, 21, 89, 121, 125, 139, 199–204, 216
- Finke, Michael, 21–22
- Forbes 400 wealthiest people list, 158, 159n6
- Foundations, 155
- “Four stakeholders,” xii
- Fractal Market Analysis (Peters), 196–197, 215
- Fragility analysis of goals‐based inputs, 137–146, 141f
- Friedman, Milton, 3–4
- Friedman‐Savage paradox, 3–4, 7, 174–179
- Future wealth, as variable, 143
- G
- Gambling, 1–2, 16n10, 27–28, 161, 163, 174–178, 182–184, 186–192, 191f
- Gamma risk, 138
- Gaussian distributions (Gaussian return assumption), xvi, 10, 18–20, 33n4, 41n8, 50, 53, 66–73
- Glide‐path portfolios, 207
- Goals, xv
- allocation across, 24, 31–43, 42t
- ascertaining relative value of, 31–32, 129
- aspirational, 16, 27
- financial, xix
- having multiple, 14, 17
- helping clients develop clarity of, 37–43, 39t, 40f
- process of setting, 20
- Goals‐based investing, xvii, xixf
- Goals‐based investors, xv–xix, 192–197, 194f
- Goals‐based portfolio theory, xvi, xx, 6, 10
- Goals‐based utility theory, 3, 175n2, 183, 192, 197
- Goals‐based wealth management, x–xii
- Goals‐Based Wealth Management (Brunel), 10, 14, 215
- Governance, family, 151–156
- Graham, Benjamin, 4, 20
- Granularity, in valuing goals, 32–33
- Graphics, in reporting, 129, 130f, 131
- Guillemette, Michael, 21–22
- H
- Hedging (hedged portfolios), 81–84, 81t, 82f, 211
- Heuristics, 11
- High‐variance assets, 161–171
- angel investments, 165–166, 168
- and aspirational goals, 162–163
- cryptocurrencies, 169, 171
- and efficient frontier, 161–163
- volatility–return tradeoff with, 163–164, 164f
- YOLO trades, 164
- Human capital, 17, 89, 122, 134–135
- Human risks, 147–159
- dual shareholder‐operator role, 150–153
- dynastic wealth, 158–159
- family governance, 151–156
- training of the next generation, 148–150, 152–153
- trust and loyalty, 156–157
- vision, 155
- Hunt family, 158
- I
- Ibbotson, R. G., 89
- Ilmanen, Antti, 216
- Impact investing, 97–107
- effect of market shifts on, 105
- and ESG constraints, 98–99, 203
- and generational differences, 105
- and Maslow‐Brunel pyramid, 105
- and modeling the client's point of indifference, 100–103, 101f
- and philanthropic goals, 102–103
- and reporting, 135
- and willingness to sacrifice return, 103, 104f, 105
- Implementation plans, 155–156
- Independent (axiom of rational choice theory), 12–13
- Indifference, 12
- Inflation, 90–95, 92f, 93f, 137, 139, 143–146
- Insurance, xii–xiii, 85–96, 212–214
- amount needed, 89
- and annuities, 85, 86, 93–94
- estimating value of, 86–89, 88f
- increasing customization of, 95
- and inflation, 90–96, 92f, 93f
- and monetary/mortality risk, 90
- from perspective of the purchaser, 86
- The Intelligent Investor (Graham), 4, 20
- Investments, allocating across, 31–43
- “Is Your Alpha Big Enough to Cover Its Taxes?” (Jeffrey and Arnott), 6
- J
- Jeffrey, Robert, 6
- Jondeau, Eric, 216
- Journal of Financial Planning, 216
- Journal of Impact and ESG Investing, 216
- Journal of Wealth Management, 215
- K
- Kahneman, Daniel, x, 6–7, 188, 192
- Kitces, Michael, 216
- Kronecker product, 51–52
- L
- Lazy shareholders, 150
- Leverage, xv–xvi, 25, 66, 162
- Levy‐alpha‐stable distributions, 67, 68, 69f–71f
- Linear increases in event significance, effect of, 138–139
- Liquidity (liquidity risk), 110, 119, 121–123, 195–197
- Logistic cumulative distribution function, 23–26, 111, 163, 177, 193
- Logistic distributions, 25, 53, 88, 99, 164f
- Losses, portfolio, 6–7, 9, 73–78, 81, 83, 128–129, 213
- Loss tolerance, time horizon's effect on, 74, 74f, 75, 76–78, 77f
- Lottery tickets (lottery‐like investments), 7, 39t, 41, 42–43, 42t, 161, 164, 165, 174, 176, 212
- Loyalty, 156–157
- M
- Mandelbrot, Benoit, 72
- Maps, usefulness of, 11
- Marginal theory of utility, 2
- Markets, xvii, xxi, 65–67
- Market downturns, 69, 70
- Market shifts, effect of, on impact investing, 105
- Markowitz, Harry, xi, 4–6, 8–9, 12, 19, 20, 188, 209
- Martellini, L., 15, 131
- Maslow, Abraham, 7
- Maslow‐Brunel pyramid, 14–16, 15f, 27, 86, 105, 157, 162, 176, 212
- Maslowian hierarchy of needs, 7, 14–16, 15f, 27
- Mean‐variance efficient frontier, 25
- Mental accounting, 7–8
- Milevsky, M. A., 89
- Milhau, V., 15, 131
- Models, 47, 146, 209–210
- “Model portfolio” approach, 46–47
- Modern economics, beginnings of, 1–3
- Modern portfolio theory (MPT), 5–6, 11, 20–29, 43, 161–164
- Modern Portfolio Theory and Investment Analysis (Elton et al.), 162–163
- Monte Carlo simulations, 33, 35, 40–41, 73, 139–140
- Morgenstern, Oskar, 3, 12–13, 187
- MPT, see Modern portfolio theory
- N
- Needs, psychological and physical, 7
- Newton, Isaac, 173
- New wealth, ix–x
- Next generation, educating and training the, 148–150, 152–153
- Normative economics, 173–174, 176–177, 180, 183, 191–192
- Normative finance, 13
- O
- Odean, Terrence, x
- Old wealth, ix
- Optimizers, for allocating wealth through time, 45–48, 60–63, 62f
- Option contracts, 171
- P
- Pareto distributions, 165–167
- P/E ratios, 195
- Peters, Edgar, 196–197, 216
- Philanthropic goals, 102–103
- Physical needs, 7
- PMs, see Portfolio managers
- Pool of wealth, 17
- Poon, Ser‐Huang, 216
- Portfolio construction problem, 14
- Portfolio losses, 9, 73–78, 81, 83, 128–129, 213
- Portfolio managers (PMs), 76, 115, 116, 119–122, 126, 128, 131–134, 204, 205f, 213–214
- Portfolio optimization:
- across‐goal, 34–35
- in modern portfolio theory, 21, 27f
- within‐goal, 33–34
- “Portfolio Selection” (Markowitz), 4, 12
- Prescriptive theories, 13
- Price‐setters, xvii
- Private wealth, ix
- Probability weighting function, 188, 189f
- Psychological needs, 7
- Q
- Quantitative skills, 210
- R
- Rabin, Mathew, 180–182
- Ranked‐choice voting, 158n4
- Rational choice theory, 3–4, 12–20
- modern portfolio theory vs., 20–29
- Real‐world constraints, xvii, 10, 19–20, 47, 162
- Recession of 2008, 45, 73, 125
- Regulators, 135, 171, 201, 204, 214, 215
- Renaissance, 1
- Reporting, 125–135, 201–202
- and accuracy of forecasts, 132–134
- Brier score in, 132–133
- deficiencies of goal‐based, 134–135
- example of goals‐based, 126–128, 127f
- expected shortfalls in, 131
- and human capital, 134–135
- and impact investing, 135
- relative performance in, 128–129
- visuals/graphics in, 129, 130f, 131
- Required return, 23, 25–27, 33, 43, 45, 52, 59–61, 101, 101f, 104f, 105, 128, 130f, 131–132, 162, 163, 166, 206, 206t
- Retirement funds, “double dipping” from, 142
- Risk(s):
- as volatility,
- as probability of failing to achieve a goal,
- downside vs. upside, 75
- gamma, 138
- time until a goal,
- human, 147–159
- Risk tolerance, xviii, 21–22, 75
- Risk‐tolerance questionnaires, 21–22, 28, 32, 204, 214–215
- Rockefeller family, 158
- Rockinger, Michael, 216
- Roy, AD, 4–5
- S
- “Safety First and the Holding of Assets” (Roy), 4–5
- “Safety‐first” criterion, 5
- St. Petersburg paradox, 183–187, 185f
- Samuelson, Paul, xvi, 72, 179–182
- Samuelson's paradox, 179–182
- Savage, L., 3–4
- Scheid, Jonathan, xi, 8–9
- Shareholders, lazy vs. effective, 150
- Shefrin, Hersh, x, 8
- Shiller, Robert, 3
- Short selling, xv–xvi, 25, 66, 162, 209
- Single‐premium immediate annuities (SPIAs), 94
- S&P 500 index, 66, 67f–69f, 72f
- Spendthrifts, xix
- Star Trek, 151–152
- Statistical Consequences of Fat Tails (Taleb), 216
- Statman, Meir, xi, 8, 15
- “Stay‐wealthy” approach, “get‐wealthy” vs., 147–148
- Stop‐losses, 75
- Subperiods, 49–50, 60
- T
- Tail‐heavy distributions, 169
- Tail Risk Hedging (Bhansali), 80n9, 175n2, 216
- Taleb, Nassim, 67, 138, 216
- Taxes, 6, 109–124, 206–207, 212–213
- and asset location, 120–122
- and benefit of taxation, 120
- and calculation of allocation matrix, 114–116, 115t, 116t
- estate, xiii
- importance of considering, 109–110
- and liquidity risk, 121
- and rebalancing, 112–114, 119–123
- and transaction costs, 119–120
- and utility maximization, 110–112
- Tax‐drag, 6
- Technology, 24, 95, 112, 116, 135, 202–205, 211. See also Computing power
- Thaler, Richard, x, 7–8, 176, 180–181
- Theories, usefulness of, 11
- The Theory of Games and Economic Behavior (von Neumann and Morgenstern), 3
- Time, allocating wealth through, 45–63
- and capital market expectations, 45–50, 53, 54t–55t, 59–61
- and “certainty threshold,” 47–49
- and coming period, 45–46
- and computational times vs. accuracy, 62f, 63
- and fragility, 144
- and multiperiod capital market expectations, 53, 54t–55t, 56f
- need for accurate tools for, 46
- point estimates, 53, 56–59, 56f
- and probabilities vs. returns, 50–53
- and required returns, 206, 206t
- subperiods, 49–50, 60
- summary of procedure for, 60–61
- using Bellman's dynamic programming technique, 46–47
- Traditional utility theory, 28, 178, 180
- Transitive (axiom of rational choice theory), 12
- Trusts, ix
- Trust and loyalty, 156–157
- Tversky, Amos, 6–7, 188, 192
- U
- Upside risk, 75
- Utility, 21, 178
- Utility‐of‐wealth curve, 178, 179f
- Utility theory:
- V
- Vision, family, 155
- Visuals, in reporting, 129, 130f, 131
- Volatility, 66, 67, 67f, 78, 80n9, 82, 82f, 89, 100, 101, 103, 104f, 105, 111–112, 120, 134, 142, 143, 163–165, 164f, 169, 193–194, 212, 215
- Von Neumann, John, 3, 12–13, 187
- W
- Wealth:
- dynastic, 158–159
- future, as variable, 143
- “get‐wealthy” vs. “stay‐wealthy” approaches to, 147–148
- in goals‐based theory of utility, 3
- initial, 18
- pool of, 17
- Wealth management, xviii
- Wealth management firms, 199–207, 205f
- “Wealth tax,” 159n6
- Windfalls, 20
- Windfall effect, 20
- Wittgenstein's Ruler, 67
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